The South African government has quietly been piloting a new seed-funding programme and has wisely teamed up with universities to do so. A new call closes on October 2.
The programme, which the Minister of Science and Technology Naledi Pandor (pictured above) said in July was still in the pilot stage, was launched two years ago by the long embattled Technology Innovation Agency (TIA).
The seed fund is welcome news from an agency that has suffered from the departure of key staff and one having to deal with a recent budget cut (see this story).
South African entrepreneurs with good ideas are badly in need of small grants to help test and commercialise their ideas. Once the idea takes off they might more easily be able to get funding from a bank or venture capital fund.
Where's the seed?
In a survey in June SA tech start-ups listed access to finance as a top concern. The survey also revealed that 44% of those that were able to get funding, received investments of less than R50,000 ($3,600). Only 16% said they had received more than R1 million ($72,000).
The authors said this raised the question of why South Africa does not have more seed funding rather than equity or royalty splits for financing such start-ups.
In a recent Financial Mail article, venture capitalist Keet van Zyl of Knife Capital suggested that the government could put out challenges to start-ups to solve specific issues to catalyse growth. TIA's latest call may show that the government is listening.
TIA has so far run two rounds of seed funding for its fund targeting universities (the HEI Seed Fund). In the first, in the 2013/14 financial year, it disbursed R26.8m to 70 projects, while in the second, held in the 2014/15 year, it disbursed R43.7m, according to the agency's 2014/15 annual report.
A further R33m had been invested in 74 projects through another seed fund where TIA partners with seven regional organisations in provinces (including development finance institutions and incubators). These organisations contributed an additional R30m.
The organisations are: the Cape Craft Design Institute, The Innovation Hub, Smart Exchange, Invotech, the Free State Development Corporation, the Eastern Cape Development Corporation and the Limpopo Economic Development Agency.
In July Pandor said discussions were ongoing between the department and TIA, as well as other stakeholders to leverage more funds.
Under the latest call for its HEI Seed Fund, which went out two months ago, TIA is looking to fund 50 start-ups with a collective R25 million, TIA communication manager Chriszelle Vorster said this week.
Each project would be limited to a maximum of R500,000 in funding and entrepreneurs can use the funds to help develop prototypes, proof of concepts and businesses cases that could be used for further development.
Each applicant is required to work with a their respective technology transfer office which will then prioritise a list of projects and submit it to TIA to draw up the final list.
Vorster said TIA has also initiate efforts to explore whether the agency can extend its partnership model for seed funding to science councils as well.
Partnering with universities and other organisations that can help select and assist those with good ideas seems to be the way to go.
For many years Chile's small business agency Corfo worked with incubators and trade organisations to disburse seed funding to entrepreneurs with bright ideas.
Between 2010 and 2013, 620 enterprises received seed capital worth 12,000 million pesos ($17m). However in 2013 Corfo decided that entrepreneurs can instead apply directly to the agency, through specific seed funding rounds (last year it offered two such rounds).
This was partly to ensure that entrepreneurs in those regions in Chile where there are no or few entities to team up with, were not prevented from pitching.
Corfo's experience however still offers two key lessons to South Africa.
Competitive as possible
The first is to make the decision on which firms to fund, as competitive as possible. Last month Corfo awarded its first 2015 round of seed funding to 53 entrepreneurs - chosen from a mammoth 2,200 that applied from April.
An external panel of experts evaluates applications, to ensure fairness and objectivity in the selection process. Those that Corfo opts to fund are then announced on its website.
Marcelo Diaz Bowen (pictured above), the former manager of IncubaUC, said those that aren't selected in one round can always apply for funding in the next one. Corfo also provides feedback to applicants and in this way applicants can opt to adapt their idea.
Skin in the game
The next lesson is to ensure that entrepreneurs also contribute some of the funding themselves. To get funding from Corfo's seed fund (which contributes up 25 million pesos - about $35,000) applicants must cover 25% of project costs.
Ultimately TIA's introduction of seed funding is a welcome development and could help fund many new bright ideas, some of which could good turn into potential money spinners, creating the thousands of jobs that the country badly needs.
Timm is a South African who writes on small business. He is currently based in Cape Town, South Africa. Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
Stephen Timm is a